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Crowdfunding Lawyer's Fee Acceptable With Safeguards

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By Samson Habte

Dec. 29 — Ethics rules
permit a lawyer to use a “crowdfunding” platform to solicit
donations that would cover his fees for bringing a lawsuit on
behalf of a client who can't afford to pay the lawyer, the
Philadelphia bar's ethics committee concluded in a December opinion.

The opinion appears to be the first one from a bar
association to address the propriety of a practice the committee
described as increasingly prevalent: the use of crowdfunding
websites by “lawyers seeking to raise funds that will cover
expenses or fees incurred in connection with litigation.”

The committee endorsed this use of crowdfunding—if
lawyers do it right.

“Crowdfunding sites can be a beneficial source of
funds allowing the public to assist in the assertion of valid legal
claims that might otherwise go without recourse,” it said. “Thus,
great care should be taken to make sure that the initial
development of such sites not affect the ability of subsequent
persons to use such a source.”

Potential Problems

The opinion responds to an inquiry from a lawyer who
wants to use a crowdfunding site to solicit donations that would
cover his fee for bringing a lawsuit against a government entity on
behalf of a client who can't afford to pay for counsel. The
inquirer said he believed “certain members of the public might be
interested in supporting what they would view as a worthy public
cause.”

The committee concluded that ethics rules do not, as
a general matter, forbid the use of crowdfunding to collect
donations that will serve as a lawyer's fee.

But the opinion is studded with caveats—including
warnings that the proposal would be unethical if it allows the
lawyer to “be paid as a fee whatever sum is raised by crowdfunding,
regardless of its amount” and irrespective of the time ultimately
spent on the matter.

That raises “the possibility of a clearly excessive
fee,” in violation of Pennsylvania Rule of Professional Conduct
1.5, if the matter “ends quickly with relatively few hours of work
expended,” the committee said.

Treating crowdfunded donations as earned upon
receipt is also problematic because it amounts to charging a
nonrefundable retainer, the committee said. While “there is no per
se prohibition on non-refundable retainers in Pennsylvania,” it
added, such fee arrangements raise concerns if they interfere with
a client's ability to discharge a lawyer.

Accordingly, the committee said a lawyer seeking
crowdfunded donations to cover his fee should make clear the scope
of his obligation in return for the payment, and should guard
against the possibility of charging an excessive fee by placing
crowdfunded donations in trust until they “are earned in accordance
with the terms of the final fee agreement.”

Devil in the Details

The inquiring lawyer said his client—who will seek
equitable, nonmonetary relief in the anticipated lawsuit—has agreed
to assign to the lawyer any statutory attorneys' fees that may be
awarded if the suit succeeds.

The inquirer asked whether he may also solicit
compensation on a crowdfunding site. The inquirer said he would
make it clear to the client and potential donors that any amounts
raised “would be payments to counsel, not the [client],” and would
remain his property even if the court awards attorneys' fees.

The committee said it “reviewed many crowdsourcing
sites” and encountered campaigns by other lawyers seeking similar
arrangements. The committee said that although it “does not view
those efforts as inherently problematic,” the inquirer's proposal
is insufficiently clear about certain matters that raise ethics
concerns.

Conditions to Meet

The committee said a lawyer who solicits donations
to cover his fee in a client's matter must, as a threshold matter,
abide by Rule 1.8(f).

That rule provides that a lawyer may accept
compensation for representing a client from a third party if the
client gives informed consent, there is no interference with the
lawyer's independent judgment and client confidences are
protected.

The committee further determined that a lawyer who
wishes to crowdfund his fee in a client's matter must satisfy these
conditions:

• The fee agreement describes “the lawyer's
obligation to remain in the case, assuming the client wishes him to
do so, until its conclusion or until some other point at which
retention of the total fees paid would not constitute an excessive
fee.”

• Donations are held separate from the lawyer's
property in “a trust account established under Rule 1.15” until
they “are earned in accordance with the terms of the final fee
agreement.”

• When soliciting crowdfunded donations the
lawyer will “describe the matter and the fact that the funds are
sought in connection with a fee … in a manner that is entirely
truthful and not in any way misleading and advances the cause of
the client without revealing too much confidential information.”
The committee said false or misleading statements on those subjects
would contravene Rules 4.1 (truthfulness in statements to others)
and 7.1 (communications about lawyer's services).

To contact the reporter on this story: Samson Habte
in Washington at shabte@bna.com

To contact the editor responsible for this story:
Kirk Swanson at kswanson@bna.com

Copyright 2016, the American Bar Association and The
Bureau of National Affairs, Inc. All Rights Reserved.

Other Opinions Address Separate
Issues

A review of authority by Bloomberg BNA indicates
that Philadelphia Ethics Op. 2015-6 analyzes a question that has
never been the subject of official guidance from a bar
association.

One state bar panel—tackling another question of
first impression—found that attorneys “may engage in certain types
of crowdfunding” to raise capital needed to launch a new law
practice. See New York State Ethics Op. 1062, 31 Law. Man. Prof.
Conduct 455 (2015).

Several ethics opinions not addressing crowdfunding
have examined the propriety of steering clients to litigation
funders that offer nonrecourse loans in exchange for an interest in
the proceeds of a case. See New York City Ethics Op. 2011-2, 27
Law. Man. Prof. Conduct 405 (compiling authority).

The Philadelphia opinion seems to be the first to
address whether a lawyer may use crowdfunding to solicit
compensation for his work on a case from people who “would receive
nothing more than the satisfaction that they offered financial
support to a legal cause in which they believe.”

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